New tax requirements for out-of-state wineries shipping DTC in Texas
- Sep 14, 2020 | Gail Cole
Out-of-state businesses that have economic nexus with Texas have been required to collect and remit state and local sales and use tax since October 1, 2019, when the state’s economic nexus law took effect. Out-of-state wineries with direct shipper permits have always been required to collect state sales and use tax, but with economic nexus, Texas now imposes an additional local tax burden.
Out-of-state wineries must have a Texas use tax permit in order to make direct-to-consumer (DTC) sales into Texas. All registered out-of-state wineries must collect state sales and use tax, but until the recent changes to Texas sales tax laws and regulations, they’ve only needed to collect local sales and use tax in jurisdictions where they’ve had a physical presence in the last 12 months. According to the comptroller, a physical presence (or physical connection) includes sending salespersons into a jurisdiction or attending trade shows or similar events to solicit or promote sales.
Now, all out-of-state wineries holding a sales tax permit — and that’s all out-of-state wineries shipping directly to consumers in the Lone Star State — are required to collect local sales or use tax on all sales into Texas.
Although the comptroller’s out-of-state wineries and Texas taxes page still says out-of-state wineries that are not engaged in business in any local jurisdictions in Texas (i.e., with no physical presence in a jurisdiction) don’t have to collect local use tax, Wine Institute and Avalara have learned the comptroller requires all registered out-of-state DTC wineries to collect and remit local sales and use tax based on the location where the items are shipped or delivered, or where the purchaser takes possession of the items.
Licensed wineries should commence local sales and use tax collection immediately and remit it with their September return (due by October 20, 2020). Those that don’t may have to eat (drink?) the tax — pay it themselves or go back to customers and ask for it.
As remote sellers, out-of-state wineries that don't have a physical presence in Texas may choose to collect the state’s single local use tax* rate for all sales into the state.
One local use tax rate to rule them all
Rather than collecting the individual rates in effect at each locality, most remote sellers are permitted to collect a flat local tax rate (currently 1.75%, so a total rate of 8%) for all sales into the state. This is a much simpler option for remote sellers and DTC wineries, as there are more than 1,500 local jurisdictions in Texas. Unfortunately, this option isn’t available to marketplace providers collecting on behalf of marketplace sellers.
The Texas Comptroller requires all registered businesses to notify the comptroller’s office in writing if they intend to collect the single use tax rate. This should be done by filling out Form 01-799 Remote Seller’s Intent to Elect or Revoke Use of Single Local Use Tax Rate and submitting it by email or mail. Businesses should start collecting the single local use tax rate on the first day of the next reporting period. Avalara can take care of this on behalf of customers.
Businesses collecting the single local use tax rate that wish — or need — to stop collecting it must notify the comptroller by completing Form 01-799 and sending it by email or mail to the comptroller’s office. However, businesses must continue to collect the single local use tax rate as follows:
- If you notify the comptroller’s office before October 1, collect the single rate through December 31 of that calendar year.
- If you notify the comptroller’s office after October 1, collect the single rate through December 31 of the following calendar year.
For example, a revocation received April 1, 2020, will take effect January 1, 2021, while a revocation received November 1, 2020, will take effect January 1, 2022. The comptroller’s mailing address is on its Remote Sellers webpage, along with additional information.
Franchise tax filing requirement
Franchise tax is a privilege tax on each taxable entity formed, organized, or doing business in Texas. “Doing business in Texas” means having nexus with Texas. Nexus is established through physical presence or a certain level of economic activity in the state ($500,000 or more in gross receipts in the state in a 12-month period).
As described in the 2019 amendments to Rule 3.586 regarding franchise tax and economic nexus, the comptroller presumes a non-Texas entity with a use tax permit is also subject to franchise tax. Accordingly, because out-of-state DTC wineries are required by law to have a sales and use tax permit and collect and remit state sales tax, the Comptroller presumes these wineries have nexus with Texas, are “doing business in Texas,” and have a franchise tax obligation.
Wineries that don’t have physical or economic nexus with Texas can overcome the franchise tax assumption by completing a nexus questionnaire and indicating they have less than $500,000 in gross receipts from Texas sales.
Thus, all wineries shipping directly to consumers in Texas should complete a nexus questionnaire (aka, Franchise Tax Accountability Questionnaire) and remit it to the comptroller. The comptroller will use that information to determine whether a franchise tax obligation exists.
If a winery is subject to franchise tax but doesn't owe any tax, it must file a No Tax Due franchise tax report (Form 05-163) by May of the following year. The threshold for No Tax Due is an annualized total revenue at or below $1,110,000.
Businesses that don't establish nexus the following year don't need to complete the nexus questionnaire in subsequent years. However, any business that establishes physical or economic nexus in Texas during a calendar year will need to submit a nexus questionnaire as well as any franchise tax owed.
Avalara can help
Avalara can help customers register to collect and remit the single local use tax or the varying individual local taxes. We’ll also help you remit tax and file returns whether you collect the single local tax or individual local taxes.
*It’s called a use tax rather than a sales tax because the seller has no physical presence in the state.